20th May 2020 - AUD sets new highs overnight, bulls target 200 dam

Good morning

OVERNIGHT DATA AND HEADLINES

German investor sentiment improved much more than expected in May as concerns about the impact of the coronavirus pandemic on Europe's largest economy eased. The ZEW research institute said its monthly survey showed economic sentiment among investors rose to 51.0 from 28.2 in April. Economists had expected a reading of 32.0. A separate gauge measuring investors' assessment of the economy's current conditions edged down to -93.5 from -91.5 in the previous month. Analysts had forecast a reading of -88.0.

U.S. homebuilding dropped by the most on record in April and permits for future construction tumbled. Housing starts tumbled 30.2% to a seasonally adjusted annual rate of 891,000 units last month, the lowest level since early 2015. The percentage decline was the biggest since the government started tracking the series in 1959. Starts dropped 18.6% in March. Economists polled by Reuters had forecast housing starts would fall to a pace of 927,000 units in April. Homebuilding fell in all four regions last month. Housing starts plunged 29.7% on a year-on-year basis in April. Permits for future home construction plunged 20.8% to a rate of 1.074 million units in April, the lowest level since January 2015. The despite the sharp drop, permits are outpacing starts, which bodes well for homebuilding in the coming months. Housing completions dropped 8.1% to 1.176 million last month. Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap. The stock of houses under construction fell 1.7% to 1.195 million units.

The number of people claiming unemployment benefits in Britain leapt in April to its highest level in nearly 24 years. The claimant count rose by 856,500 - the biggest ever month-on-month jump - to 2.1 million, a 69% increase from March, data published on Tuesday showed. It was the highest level since July 1996, when Britain's economy was still recovering from a deep recession caused by its failed bid to stay in the European Exchange Rate Mechanism. April's surge would have been even sharper without an emergency government programme to pay 80% of the wages of 8 million employees - or about one-in-four workers - put on temporary leave, who are not counted as unemployed.

U.S. Treasury Secretary Steven Mnuchin on Tuesday defended the Trump administration's fiscal response to the coronavirus pandemic and told senators he was willing to consider extending and modifying a payroll loan program for small businesses. Mnuchin and Federal Reserve Chair Jerome Powell said the nearly $3 trillion in coronavirus rescue programs rolled out by the federal government over the past two months were working to support an economy devastated by the novel coronavirus.

President Donald Trump said on Tuesday the United States should consider terminating trade deals under which it imports cattle as the federal government moves to help agricultural producers hard hit by the coronavirus outbreak. "I read yesterday where we take some cattle in from other countries, we have trade deals. I think you should look at terminating those deals," Trump said at a White House event on food aid. "We have a lot of cattle in this country.” Mexico exports more than 1 million cows across the border each year that become part of the U.S. beef supply. Trump made the comments at a White House event held to discuss how the $19 billion in coronavirus relief approved by Congress to help farmers will be distributed.

The S&P 500 closed lower on Tuesday, as investors focused on a report questioning Moderna's recent coronavirus vaccine early-stage trial results, wiping out modest gains on the benchmark index in the last hour of trading. Major averages fell to session lows in the wake of a report from STAT News that questioned the validity of the results of Moderna's vaccine trial, which the company had announced Monday. Moderna shares plunged about 10% after the report. Dow Jones fell 1.56% to end at 24,213.76 points, while the S&P 500 lost 1.03% to 2,923.48. The Nasdaq dropped 0.52%, to 9,186.97.

CURRENCIES

The USD fell to fresh lows, DXY was down at 99.24 however saw a late jump higher towards 99.69.

EUR continued its solid performance, rising from 1.0900 to touch a 1.0976 high but fell into the close down towards 1.0922.

Against the JPY the USD rose 0.37% to a near one-month high at 108.09. Ended the session lower at 107.70/

AUD was stronger overnight, keeping all of its gains from yesterday and touching a new fresh high at 0.6586 before falling back lower at 0.6532.

NZD mirrored AUD, breaking through 0.6100 resistance to touch a 0.6121 high before falling back lower at 0.6073.

AUDNZD remained in a tight range, trading in and around 1.0750 / 1.0770.

AUDEUR made another attempt to break through 0.6000 but ended slightly lower at 0.5980.

TREASURIES

U.S. Treasury yields fell as Federal Reserve Chair Jerome Powell shed no new light on the government's economic response to the coronavirus pandemic and the market looked ahead to the return of the 20-year bond.

The 10-year yield was last down 3.3 basis points at 0.7094%. The 2-year yield was last down 1.2 basis points at 0.1712%.

The gap between yields on 2 and 10 year Treasury notes was at 53.17 basis points, about 4 basis points higher than on Monday's close.

Italian yields fell across maturities. The 10-year yield fell 9 bps to 1.599% at one point, its lowest since April 9, before rising again to 1.65%.

COMMODITIES

Gold rose - Spot gold up 0.7% to $1,743.25 per ounce.

Chinese iron ore futures rose for a fifth straight session, supported by a bullish outlook for Chinese demand stemming from hopes of more stimulus. Iron ore on the Dalian Commodity Exchange rose 3.6% to close at 711 yuan ($100.07) a tonne, and gained 13% over the five-day rally. The spot 62% iron ore grade scaled a four-month peak at $95.70 a tonne.

Copper prices retreated from a two-month high - three-month LME copper up 0.7% at $5,354.50 a tonne, paring gains after touching $5,377.50, its highest since March 16.

LME aluminium shed 0.6% to $1,487 a tonne after touching $1,502, the strongest since April 30, while zinc added 0.4% to $2,031.50 after hitting $2,038, the highest since March 13.

U.S. crude ended slightly higher on Tuesday as U.S. Treasury Secretary Steven Mnuchin said he supported extending certain measures intended to bolster the economy, while Brent ended lower on concerns that output cuts might not be sufficient. The front-month contract for U.S. WTI crude settled up 68 cents a barrel, or 2.1%, at $32.50 a barrel. One month ago, the June contract pushed into negative territory ahead of expiry. Benchmark Brent crude was settled at $34.65 a barrel, down 16 cents or 0.5%.

ECONOMIC CALENDAR TODAY

Australia - April Westpac MI leading index (last -2.47). To fall steeply, led by a deep contraction in hours worked.

US - FOMC meeting minutes & FOMC’s Bullard to take part in a discussion on the economy.

AUD THOUGHTS AND TECHNICAL ANALYSIS

AUD vaulted to a new fresh high overnight, clearing the previous high set at 0.6561 to touch 0.6586 before falling lower as U.S. equities tumbled lower on concerns of the validity of the recently announced COVID vaccine.Risk barometer AUDJPY broke out past major resistance levels to an almost 71.00 break and key commodity prices continued to make gains.

China effectively banned Australian barley imports yesterday after concluding Canberra's water market was a subsidy for growers, documents showed on Tuesday, a position Australian government sources described as ludicrous. Australia said it was considering an appeal to the World Trade Organization (WTO) as it tries to dampen fears that China is launching a trade war in retaliation for Australia's calls for an investigation into the origin of the novel coronavirus. China said on Monday it would apply an 80.5% tariff on Australian barley imports for the next five years, a move expected to all but halt a billion-dollar trade. Western Australia state Agriculture Minister Alannah MacTiernan said growers in her electorate would lose about A$200 million as a result of China's action. Growers could be forced to sell their premium barley - often used for making beer - to the Middle East for livestock feed at a heavy discounts, raising pressure on the federal government to refer the matter to the WTO.Australia is facing an "unprecedented" economic contraction due to the coronavirus pandemic, though massive fiscal and monetary stimulus would help cushion the blow, minutes from the country's central bank's last meeting showed on Tuesday. The minutes showed board members discussed a range of economic scenarios in their policy deliberations, with the baseline case for gross domestic product to fall by 10% in the first half and 6% for all of 2020. "Given this outlook, the Board would maintain its efforts to support the economy by keeping funding costs low and credit available to households and businesses," the RBA added.Today we have the Australian MI leading index data released. The Leading Index growth rate fell to –2.47% in March, a sharp drop consistent with a deepening economic impact from the Coronavirus pandemic. The March read was the most negative seen since the GFC, albeit still well above the extreme lows seen then and during recessions. The April read is set to be much weaker. There have been impressive rebounds in some components – the ASX 200 up 8.8% (vs -21.2% last month) and both the Westpac-MI Consumer Expectations Index and the Westpac-MI Unemployment Expectations Index more than reversing the deteriorations last month. And some other components have remained quite mixed – commodity prices down only slightly in AUD terms (-0.3%) and dwelling approvals down -4%. However, the update will be dominated by April's outsized decline in total hours worked – the 9.2% drop more than two and a half times larger than the biggest monthly variation seen in the forty years the data has been collected.